How to Write an Authorization to Repair and Repair Contract—Documentation Part 1

Tuesday, 29 July 2014 00:00

How to Write an Authorization to Repair and Repair Contract—Documentation Part 1

When I first started to write about the collision repair industry, I was astonished by the plethora of issues that can arise on any given day, but what surprised me the most was the difficulty that so many repair facilities face when trying to receive proper compensation for the work they have (already performed); after all, I fully expect to be paid for the work I do, and as a consumer, I would hope that the people who repair my vehicle receive the same consideration.

Unfortunately, I now know that is not always the case, but I’ve also learned that there is a way for repair facilities to protect themselves better—by developing and maintaining records of proper Repair Documentation (such as the Repair Contract, Authorization to Repair, Assignment of Proceeds, Parts Notice and others).

In fact, legal documentation plays such an integral role in successful repair businesses that it seems foolhardy to ignore its benefits, yet though many repairers have heard about it from attorneys or colleagues, they are often unfamiliar with the role it can play in their businesses.

I decided to ask Erica Eversman, Chief Counsel for Vehicle Information Services, Inc. and founder of the Automotive Education and Policy Institute, to outline the basics so that readers can compare their own practices and determine what is best for their business. What follows is her response to my questions.

“Fixing a car means engaging in a significant activity that involves large amounts of money, yet there is no written contract to protect your interests. Maybe you discussed the repair with the customer and believe this serves as an oral contracts, but oral contracts are difficult to enforce because, sadly, people lie. Even if a customer does not mean to be deceitful, people view and remember events and conversations differently. So what can you do? Before beginning a repair, be sure to get your customer to sign an Authorization of Repair and a Repair Contract. Though the specifics vary depending on state laws, having a valid contract makes it easier to file suit to obtain the money rightfully owed to you after all other options have been exhausted. Eversman stresses that documentation is imperative because “the better prepared you are for litigation, the easier it is to get what you need.”

“First, it is important to understand the relationships between collision repair facilities, insurance companies and consumers, specifically how these are impacted by whether or not the shop participates in the insurers’ direct repair program (DRP). In a non-DRP relationship, there are two separate contracts—the insured has one contract with their insurer and a second contract with the shop repairing their vehicle. These two contracts still exist in a DRP relationship, but in this case, a third contract comes into play, the DRP contract between the insurer and the repair facility. This agreement dictates how each party will satisfy their obligations of their individual contracts with the customer, usually before a collision actually occurs. It is key to note that, in a DRP relationship, the insurance company is not required to provide business or any other benefits to the shop. Though the insurer will make it appear as though the repairer has duties to fulfill to them, they do not seem to feel any obligation to the shop, as demonstrated by their insistence that the repair facility keep them appraised of every detail pertaining to the repair while they show no inclination of reciprocating by sharing information on their part. Eversman notes, “insurers like to think that they’re in charge of everything; they want all of the control and none of the responsibility.”

“Second, repairers must be aware of their obligations as well as the consumer’s obligations. The repairer has three responsibilities: to inform the consumer about what is needed to repair the vehicle, to obtain the customer’s authorization to complete the repair, and finally, to fix the vehicle and restore it to its pre-loss condition. On the consumer side, obligations included receiving the information provided, authorizing the repair, and paying the repair facility for the completed product. Repair estimates were designed to protect the customer by ensuring informed consent, but because insurance companies now pay for the vast majority of repairs, this is not as meaningful today as it was in the past. These obligations must conform to state laws, mainly in the sense that these laws dictate what is prohibited, rather than what is actually required.

Preparing your Repair Contract

When it’s time to prepare your Repair Contract, there are five essential terms that must be adequately defined: the customer, the duties of each party, the parts, the damages and the shop’s professional judgment. Begin by defining your customer, including any relevant consumer protection laws, whether an estimate is required and any authorization received. It is imperative to recognize that the insurance company cannot be the customer as they cannot authorize the repair without the vehicle owner’s consent (some state laws may require written consent from the consumer). If a shop repairs a vehicle based on consent from the insurer and something goes wrong resulting in an accident, the insured can sue their insurance company for engaging in bad faith, but the insurer can also file suit against the repair facility, so protect your business by accepting authorization only from the consumer.

The next section of the Repair Contract should define the obligations of the repairer and customer as defined above. In defining the parts to be used, the Repair Contract should specifically indicate whether OEM, aftermarket or used parts will be utilized in the repair. The party who makes this decision depends on state laws but is generally left up to the consumer, with the repair facility’s advice playing a role in the decision hopefully. Many states require that the insured be explicitly notified and that they authorize the use of used or aftermarket parts in writing. Next, the Repair Contract should indicate what damages were sustained in the collision, along with the repairer’s professional judgment on what needs to be repaired, and how much it will cost.

The Authorization to Repair

Generally, the Authorization to Repair goes hand-in-hand with the Repair Contract; it serves to obtain written permission to repair the vehicle based on the terms of the contract. These two documents protect the repair facility from the insurance company by establishing the shop’s independence, their relationship with the customer, and their need to make a profit. When a repair is needed, the customer has the right to receive the best repair possible, but the repair facility also has the right to receive appropriate compensation for their hard work.

Another thing pertaining to these three relationships that collision repairers should be aware of is that, since it is the customer’s duty to pay for the repair, shops have no right to expect payment from the insurance company. It is the customer who must receive the repair estimate and provide authorization for the repair, but still, consumer protection is no longer about the cost – because insurers actually pay the repair bill most of the time, consumers’ concerns are centered around how their vehicle is being repaired. The Repair Contract provides for informed consent by obtaining the customer’s Authorization to Repair only after the repair process has been explained to them so they know exactly what is being done to their vehicle.

When it comes to conflicts between the repair facility and the insurer regarding the repair estimate, the repairer’s opinion carries more weight because they are the professional, not the insurance company. If an insurer wants to exert total control over a repair, they can do so by electing to repair (provided state law allows them to do so), but they rarely choose this option since it leaves them 100% liable for the repair. As such, they will usually choose to handle the claim by paying for the damages or declaring a total loss. The beauty of the DRP contract (for the insurance company, at least) is that it allows the insurer to exert more control over the repair without accepting liability, especially because of the indemnification clauses included in DRP contracts.

Please take note: because state laws vary so greatly, it is a nearly impossible feat to compile all of the requirements pertaining to each individual state. Eversman’s advice is intended to assist you in getting started with the process, but it is absolutely imperative that you enlist the aid of a local attorney who can ensure that your documentation complies with all state laws and requirements.

If you run into a situation where the insurer refuses to pay the full cost of the repair, there are methods you can take to secure payment, such as through an Assignment of Proceeds (more on this in Part 2 of this series), but it all starts with the Repair Contract and the Authorization to Repair, so invest in your business by enlisting an attorney to help you draft these vital documents and you’ll be on your way to receiving proper compensation from every repair.